Barnaby Wiener on sustainable investing methodologies and the role of ESG

Ahead of the Sustainable Investment Forum Europe 2022, Climate Action caught up with Barnaby Wiener, Equity Portfolio Manager, Head of Sustainability and Stewardship at MFS Investment Management, to discuss sustainable investing methodologies and the role of ESG.

Why is ESG important to you today?

In some respects, it has always been an important part of my approach to investing because I’ve always wanted to invest in sustainable companies, companies that are going to be around for the long term and managed in the right way. I’ve always put a high value on management quality and corporate culture. And I think that’s an integral part of sustainable investing.

In the last 5 - 10 years, I’ve become more conscious of some of the very real shortcomings of our ecosystem. And when I talk about our ecosystem, I’m not just talking about the asset management industry. I’m talking about the whole financial and corporate ecosystem that we’re a part of. On the one hand, there's clearly excessive short termism, which manifests itself in so many ways, and that’s unhealthy for long term value creation, but it’s also unhealthy for society because it incentivizes the wrong behavior. And allied with that, I think I’ve become much more conscious of some of the social inequities and the environmental challenges we face.

And so, if we want our ecosystem to endure and we want our industry to endure, we must play a part in correcting that imbalance. And that's why my interest has gone from being remote to acute.

What do you think could be improved in the way we in finance think about these issues?

So much of investing requires qualitative as well as quantitative analysis, and a lot of qualitative analysis needs to tap into the right side of the brain and not just the left. One of the problems in investing is it’s almost unacceptable to deploy the right side of the brain. In The Master and His Emissary by Ian McGilchrist, he explores how we've tried to create this divide between these two parts of our brain, between the logical, reason-driven side and the intuitive, creative side. And that’s had disastrous consequences. Both are a critical component of humanity's success. And I think that’s true in investing. So much of investing requires both the rigorous, objective, quant-driven analysis, but also, we need to free up our creative and intuitive side because that often is a source of great insight.

How do you think about ESG integration specifically?

I think that the increasingly intense focus from clients and regulation is great and welcome, but it’s also entirely aligned with what I think — and I’m not alone in this — most of us on the investment team think this is how we should be doing our job. And that is thinking through some of the less easily modellable or less modellable elements of the investment equation.

So, I think a big part of the problem that we’re addressing here — and it goes back to excessive short-termism — is people tend to get excessively focused on the numbers, and specifically for investors in companies - whether it’s equity or fixed income - modeling companies’ profitability over a relatively short time period and assessing whether they’re going to meet or beat expectations. And it always comes down to the earnings model. And as a result, the risk is you underestimate some of the less modellable but equally, if not far more, important characteristics of a durable business.

There are so many different flavors of this. There are very specific social and environmental issues that certain companies are more exposed to. So obviously, companies that emit high levels of CO2 are going to have to find ways of transitioning their business models, and for some it’s going to be easier than others. It's very, very industry-specific, and in some cases, very company-specific. Equally, there are some companies that may have benefited from being able to lower their wage cost either by offshoring or by basically moving to less unionized labor, and that trend is unsustainable and in fact I think is likely reversing.

What are your thoughts on ESG data?

Everyone is desperately trying to come up with tools and systems to enable us to measure ESG factors. But so much of it is unmeasurable - on the social side, there’s a few metrics you can look at and say, "Well, that’s interesting," like corporate turnover or wage disparity, but even those metrics can be very misleading. You can’t put a number on human experience, and everything about social is human experience. What’s the employee’s experience like? What’s the supplier’s experience, what’s the customer’s experience? All of that is by definition unquantifiable.

And then even on the environmental side, where there’s more scope for measurement, the measurements are often imperfect. If you take carbon emissions, for example, we probably have pretty good data on what companies’ scope one and scope two emissions are. But what we have very little real understanding of is the scope three emissions.

So you can find an interesting metric but it doesn’t tell you the whole story. There’s no substitute for actually engaging the brain and trying to use judgment as well as objective data to arrive at a conclusion. And then the final thing, of course, is it’s one thing to measure what a company is doing right now, but in the case of climate change, what matters is where a company’s going. The fact that an oil and gas company has a very high carbon footprint is not a reflection necessarily that it’s a bad company. Of course, it’s high — they produce oil and gas. And that oil and gas, by the way, is absolutely critical to the functioning of humanity. If we stop using oil and gas tomorrow, that would trigger a human catastrophe.

Are there any sustainability related themes that you are watching out for that might be a material risk or opportunity for your strategies?

The energy transition has had a lot of attention – and rightly so. But what's had less focus thus far is the agricultural supply chain, which is a very significant source of carbon emissions. And also, any number of environmental and social risks: soil erosion, biodiversity loss and in some cases very serious social concerns. Child labor and modern slavery probably are fairly prevalent in parts of the global ag supply chain. It can be very difficult for companies to always know what’s going on down the chain. They have pretty good visibility into their immediate suppliers, but what they don’t really have is much visibility into supply chain beyond that. But ultimately, it’s their responsibility. And so, there are externalities there that they’re not currently paying for and nor are their customers, and so what happens when that changes?

I'm also interested in the role nature-based solutions can play in averting planetary crises. Forestry and marine based solutions are both of particular interest and something I'm looking into more.

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Barnaby Wiener is speaking at the Sustainable Investment Forum Europe on the 26 April. Register now to join him in-person in London or online. You can also find out what sustainability means at MFS by listening to this new podcast here.